Apple and Wages: Why More Companies Must Raise Pay

It's been reported that some employees atApple retail stores have received a raise of up to 25 percent.

Bertrand Langlois | AFP | Getty Images

Apple

The news was noteworthy for three reasons: because it was Apple, because of the size of the increase, and because it's been so rare for large numbers of service workers to get such a significant bump.

One of the remarkable features of this expansion, which turned three years old this month, according to the National Bureau of Economic Research, has been the zero-sum game between companies and their workers.

Corporations have rebounded extraordinarily well from the great recession of 2008-2009. Corporate profits have risen from $1.3 trillion in 2009 to $1.942 trillion in 2011, and in the first quarter of 2012 were running at an annual rate of nearly $2 trillion. Corporate cash holdings are high.

Thanks to a host of factors — epic levels of slack in the labor market, the ability and constant threat to outsource and offshore, the decline of unions, and the disappearance of norms and pressure on companies to pay better — companies have been able to keep more of their revenues as profits for their owners and shareholders. As these charts show, corporate profits as a percentage of GDP are at a record high while wage earners' share of GDP is at a record low.

That's bad news for employees. And it could ultimately be bad news for companies. To a large degree, the early stages of the current expansion were driven by business, not by consumers. Exports started to trend up in April 2009, before the economy at large expanded, and have risen nearly 50 percent on a monthly basis between April 2009 and April 2012. Business investment has been robust.

But rampant global growth, which has powered exports and business investment, is subsiding.

For the recovery to continue for another three years, consumers, who account for 70 percent of economic activity in the U.S., will have to take the lead. There are signs that is happening.

Housing-related activity has been on the rise, as we've been noting. Retail salesfor 2012 are running at a pace significantly above that of 2011. But consumers remain skittish. In an environment where credit is either constrained or disdained, people will only spend more if they have more money in their pockets. Which means the economy needs more jobs, and it needs the jobs that existto pay higher wages.

The economy has been producing jobs. Since February 2010, the private sector has added 4.27 million jobs. Wages, however, have remained stagnant. In the past year, average hourly wages for private-sector jobs have risen only 1.7 percent.

In most — not all, but most — instances, companies are keeping wages constant not because they must do so in order to survive, but because they don't need to do so in order to keep employees on the job, and because they simply prefer not to.

Apple may be an outlier. The press about its operations in China and the growing footprint of its domestic retail operation have placed a spotlight on its wage policies. Apple also caters to high-end customers who might be more inclined to be troubled by the prospect of the company ringing up insane profits on the backs of low-paid workers.

In addition, the company has come to realize that loyal and highly competent store employees are now as essential to its business success as loyal and highly competent engineers.

Too Few Think Like Apple

Unfortunately, far too few businesses think like Apple. Sure, supply and demand have played a big role in the stagnation of wages in recent years. There are too many workers chasing too few jobs. But ingrained attitudes also play a big role.

The American executive class has come to view low wages and salaries as a sort of entitlement. Benchmarking is all the rage in corporate America. When it comes to the salaries of high-ranking employees, companies are eager to race to the top.

No firm wants a reputation as a place that lowballs its CEO, CFO, and general counsel. But when it comes to the salaries and wages of the rank and file, benchmarking companies are more than happy to be in the bottom quintile.

Keeping a lid on short-term compensation costs may help profits in the current quarter, or even in the current year. But it's also a remarkably short-sighted strategy. Forget about Henry Ford's now-quaint maxim that workers should be paid enough to afford a company's products.

It's hard to think of any high-performing organization, in any industry, that relishes a reputation as being a low-wage workplace. When labor markets tighten, it harms the ability to attract and retain workers. Such an attitude can be damaging to a brand.

But stubbornly refusing to offer higher pay also can lead companies to lose business and to inflict damage on the economy. This week, Paul Davidson wrote a great article in USA Today about a shortage of truck drivers.

"A worsening shortage of truck drivers is pushing up freight rates and delaying some deliveries, defying the weak economy, high unemployment and falling gasoline prices," he wrote. Companies are unable to fill positions, turnover at large truckers is up to 90 percent, and businesses are facing higher delivery costs and delays as a result.

So companies are forgoing business, inflicting delays on consumers, and gumming up the work of the national economy — a trifecta of bad outcomes. Apparently, it hasn't occurred to trucking company owners that they could fill their positions (and thus take on more orders, provide better service to customers, and help the national economy run more smoothly) if they were to pay more.

Davidson notes that average salaries for a highly taxing job that requires people to spend long periods of time away from home range from $45,000 to $50,000. He also notes that potential truckers must shell out $4,000-$6,000 for a training course, which is a lot of money.

Markets and incentives work. Something tells me that if they bumped up the pay to $55,000-$60,000 a year and offered to pay for the training course, the trucking companies would find themselves with a glut of applicants.

Not every company can be as smart as Apple. But you don't need to be a genius to recognize that there are times when increasing wages can be in the bosses' self-interest.